Opportunity and risk in virtualization

ATN-300InsightaaS: Generally, ATN is focused on a review of a single post or column, but today, I thought I'd add a bit of perspective from some research that I've been doing.

The column, below, represents the perspective of the Channel Register (a specialty site under the banner of the irreverent tech news source The Register, which has been featured in ATN items in the past) on VMware's 10-K filing. It's a bit of an odd piece: the author acknowledges that "Form 10-Ks list all sorts of risks that could conceivably send things pear-shaped for a company. So VMware's angst...is no reason to panic," but chooses to dig into some of the statements in the 10-K anyway, to illustrate risks faced by VMware, including the revenue impact of the shift to subscription sales models, the need for VMware to expand beyond its core base in server virtualization, and the difficulties of competing with large, established rivals as the industry as a whole moves towards new technology paradigms, such as SDN.

These points are all valid with respect to VMware, and important in the context of the industry, as quite a lot of companies worry about the impact of recurring rather than transactional revenue models and the pitfalls associated with competition through transitions in basic infrastructure architectures. However, data from few reports that I've been working on recently shed some additional light on this topic. 

One touchpoint comes from the work I've done with DataCenter Dynamics, combined with some that I've done with Techaisle (whose president, Anurag Agrawal, sent me a link to the Channel Register story). It suggests that server virtualization, while widely used - installed at nearly 90% of companies with 100-999 employees in the US, according to Techaisle data - is not universally deployed: both DCD and Techaisle data show that a very large number of servers are not yet operated as virtual or cloud hosts. A second comes from increased opportunities for virtualization: the Techaisle data indicates that VDI and DaaS are in very early stages of market penetration, but analysis shows that they address important IT and business requirements.

Does this mean that the issues raised by VMware in its 10-K are groundless? I wouldn't say so: there's a trend towards multi-hypervisor use at the server level that benefits insurgents like Microsoft and Xen more than VMware as the incumbent, Citrix has a well-established position in client virtualization, and potential conflict with Cisco and other behemoths is always a potential issue. However...VMware is uniquely positioned to enable hybrid cloud, which is (according to Techaisle data, and many other sources) growing very rapidly, which may boost demand for VMware's core products; relative to Citrix, VMware is large and capable B2B marketing firm with an extensive channel, so it may well gain share in the client virtualization market; SDN can fairly be viewed as an expansion path for VMware, and a threat to Cisco's core franchise; and VMware has complementary products that could help it to expand beyond its core base, or at least, to expand its presence within an already-substantial customer community.

10-Ks aren't focused on these kinds of upside issues...but analysis of company positioning that relies on 10-K information benefits from this type of additional perspective!

VMware has released its Form 10-K, the annual report in which entities listed in the USA are required to offer a warts-and-all account of all the things that could possibly go wrong.

10-Ks are famously detailed and follow a rigid format, so VMware's includes the “mine safety disclosures” required of all such documents (the section reads “Not Applicable”). Much of the content of the filing is therefore stuff the company just has to say so that investors can't say they weren't warned. But there are also some revealing nuggets in the document that VMwatchers may find interesting.

One that caught our eye on The Reg's virtualisation desk is below, in a section titled “Our new product and technology initiatives subject us to additional business, legal and competitive risks.” :

Also, certain of our new product initiatives have a subscription model. We may not be able to accurately predict subscription renewal rates or their impact on results, and because revenue is recognized for our services over the term of the subscription, downturns or upturns in sales may not be immediately reflected in our results. Moreover, as customers transition to our hybrid cloud and SaaS products and services, our revenue growth rate may be adversely impacted, during the period of transition as we will recognize less revenue up-front than we would otherwise recognize as part of a multi-year license arrangement.

VMware expressed similar sentiments during its annual earnings call, so it looks like making the transition to as-a-service offerings is causing some furrowed brows at the company...

Read the entire post on the Channel Register website: Link

 

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